We've talked about the divergence in the interest rate market, between the direction of the benchmark interest rate that the Fed sets (the Fed Funds rate), and the benchmark interest rate that's determined by the market (i.e. the U.S. 10-year Treasury yield).
The Fed has cut the Fed Funds rate by 100 basis points since September, and yet the U.S. 10-year Treasury yield has gone UP by over 100 basis points.
And as we've discussed, we have this breakout in yields. If this continues to extend, the probability of a financial shock event rises.
This move in the 10s has been attributed to inflationary policies of the incoming Trump administration.
The minutes from the December Fed meeting were released today, and revealed that Fed officials did indeed adjust their inflation outlook based on their view of Trump policies — and they also cited concerns that upward pressure on inflation could come from continued "positive sentiment in financial markets and momentum in economic activity."
If this is the driver of the activity in the U.S. bond market, then we shouldn't see a similar dynamic unfolding in European bonds, where there is no economic momentum, and where Trump trade policies would be disinflationary, if not deflationary.
If we look at Germany, the historic growth engine of Europe, the economy has five years of no growth, which is expected to continue in 2025. The European Central Bank has cut rates by 100 basis points since June, and yet the German 10 year yield is also breaking out (i.e. higher) …
The UK economy is flatlining. The Bank of England has cut rates 50 basis points since August, and yet the yield on the 10-year gilt is breaking out (i.e. higher) — now trading at the highest level since 2008.
A couple of things to keep in mind: 1) The government debt burden (as percent of GDP) in the UK has more than doubled since 2008, amplifying the debt service burden … and 2) just a little more than two years ago, the Bank of England had to intervene in the bond market at these levels to avert a financial meltdown that would have spilled over globally.